There is a thriving market for stressed assets in India and instead of no takers, we have keen bidders willing to fight to the end
Fearing action under the newly-enacted Insolvency and Bankruptcy Code (IBC), over 2,100 companies, who had defaulted loan repayments, have settled their dues to the tune of Rs 83,000 crore, a leading Indian daily reported.
A majority of the outstanding amount was cleared after the Government amended norms under the IBC to prevent promoters of companies, whose accounts were classified as non-performing assets, (NPAs) from bidding and regaining control.
The amendments under the IBC aim to keep out such persons who have wilfully defaulted; are associated with non-performing assets; or are habitually non-compliant, and are, therefore, likely to be a risk to successful resolution of insolvency of a company. In addition to putting in place restrictions for such persons to participate in the resolution or liquidation process, the amendment also provides such check by specifying that the Committee of Creditors ensure the viability and feasibility of the resolution plan before approving it. The Insolvency and Bankruptcy Board of India (IBBI) has also been given additional powers.
The amendment helped the Government to bar promoters from re-purchasing their stressed assets at a discounted price after action was initiated by the bankruptcy court, the National Company law Tribunal (NClT). As a result, top industry names such as Ruias of Essar, Singals of Bhushan Group and Gaurs of Jaiprakash Group, were left ineligible to bid.
Delays in the insolvency/bankruptcy resolution area have largely been due to three factors: Emergence of the home buyers’ issue and hitherto unimagined issues in the process; a plethora of legal cases that different stakeholders have initiated against one another; and conflicting interpretations of the IBC by concerned parties.
The Government on November 17, 2017, constituted a 14-member committee under the chairmanship of the secretary, department of corporate affairs, to assess the functioning of the IBC and examine issues that could impact the framework prescribed under the law. This committee, after examining many emerging issues, finalised and released its report on March 26.
On the home buyers’ issue, after considering the peculiarity of the Indian real estate sector and reviewing the financial terms of various agreements between the buyers and the builders, the committee concluded that the disbursement of money is in relation to the delivery of a future asset and the amounts so raised are used as a means of financing the project.
The committee, therefore, concluded that the amounts so raised from a home buyer fall within entry (f) of Section 5(8) and may be classified as “financial debt”. The home buyers, therefore, are to be treated as financial creditors by inserting an explanation to Section 5(8)(f) of the Code. Accordingly, in the resolution process, they will be a part of the committee of creditors and their claims will be met according to the manner specified under Section 53.
The committee also made a good observation that the resolution plans under the Code must be compliant with the provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA). However, while it is true that RERA gives powers to the regulator to pass orders in favour of home buyers, it has no powers to enforce its orders. Also, RERA is silent on the eventuality of the developer itself declaring insolvency. Thus, RERA also needs to be amended to plug these loopholes and make it totally in sync with the Code to protect the interests of home buyers.
Meanwhile, when the Supreme Court was approached, it asked the promoters or parent companies of insolvent housing companies to deposit large amounts upfront so that home buyers could be refunded. In the case of Supertech, the apex court has already ordered the refund of principal to home buyers and has been ordering upfront deposits of installments on hearings. Similarly, on May 16, in the case of Jaypee Infratech, it ordered its parent company, Jai-prakash Associates, to deposit Rs 1,000 crore by June 15, for refunding the home buyers.
On other issues, there are legal cases instituted against resolution professionals by different actors — employees of the insolvent company in one case and bidders whose bids have been disqualified in many cases. There are appeals against disqualification of bids to the National Company law Appellate Tribunals (NClAT) and the Supreme Court.
There are petitions in the NClATs and the Supreme Court for and against rebids and for postponement of rebids. There are petitions for accepting out-of-court settlements after the start of the resolution process and there are petitions for withdrawing the insolvency process.
Over the next few months, there will be a closure — either through a resolution or liquidation in the case of the 12 large firms referred to the NClTs under the IBC, thus promising to ease the pain for Indian lenders by writing back about NPAs worth one lakh crore rupees. This trend means there is a thriving market for stressed assets in India and instead of no takers, we have keen bidders willing to fight to the end.
(The writer is an author and a commentator)
